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Without Merkel and a largely supportive German electorate ready to back over €300 billion in bailouts and guarantees, Europe’s debt crisis could have already broken up the single currency. At the same time, the drive to rescue Europe has distracted her from signs of economic drift at home, as labour costs rise at the fastest pace in a decade, erasing most of the progress made under predecessor Gerhard Schröder.
Merkel now faces her third general election in September or October, with the economy projected by the Bundesbank to expand by as little as 0.4 per cent over the course of the year. In her New Year’s television address, she warned that the debt crisis is “far from over”, and the economic environment could be yet more difficult in 2013.
The problem of a shrinking workforce might be eased by encouraging people who can work, though don’t to take up jobs, lowering the cost of hiring and firing, and making it easier for companies and workers to agree on wage levels, according to the World Economic Forum. The WEF ranks Germany 112th out of 142 countries in terms of the flexibility of its labour rules.